Live Webcast – ICAI
Committee on International Taxation
Current Issues in Transfer Pricing
21st November,2014
PVSS Prasad, FCA
[email protected]
 Basic Principles & Key Concepts
 Methodologies & Issues
 Safeharbour Rules
 Important Judicial Perspective
 Latest Case Law
Page  2
Basic Principles
Arms Length Principle (ALP)
 Authoritative statement of the ALP is found in paragraph 1 of
article 9 of the OECD MC which reads as under:
“[Where] conditions are made or imposed between the two
[associated] enterprises in their commercial or financial
relations which differ from those which would be made between
independent enterprises, then any profits which would, but for
those conditions, have accrued to one of the enterprises, but, by
reason of those conditions, have not so accrued, may be
included in the profits of that enterprise and taxed accordingly.”
Page  3
Maintaining the Arm’s Length Principle as the
International Consensus
“While recognizing the foregoing considerations, the view of OECD
member countries continues to be that the arm’s length principle should
govern the evaluation of transfer prices among associated enterprises.
The arm’s length principle is sound in theory since it provides the closest
approximation of the workings of the open market in cases where
property (such as goods, other types of tangible assets, or intangible
assets) is transferred or services are rendered between associated
enterprises. While it may not always be straightforward to apply in
practice, it does generally produce appropriate levels of income between
members of MNE groups, acceptable to tax administrations. This reflects
the economic realities of the controlled taxpayer’s particular facts and
circumstances and adopts as a benchmark the normal operation of the
Source : OECD Transfer Pricing Guidelines – OECD 2010
Page  4
Arms Length Principle (ALP)
 In other words, the transactions between two related parties must be
based on the arm’s length principle (ALP). The term arm’s length
principle itself is not a term specifically used in Article 9, but is well
accepted by countries as encapsulating the approach taken in Article 9,
with some differing interpretations as to what this means in practice. The
principle laid out above in the UN Model has also been reiterated in the
OECD Model Tax Convention and the OECD Guidelines as supplemented
and amended.
 Thus, the arm’s length principle is the accepted guiding principle in
establishing an acceptable transfer price under Article 9 of the UN
Model. The arm’s length principle by itself is not new; it has its origins in
contract law to arrange an equitable agreement that will stand up to
legal scrutiny, even though the parties involved may have shared
Source: UN Transfer Pricing Manual
Page  5
Sharing the Pie
 The reason why governments and multinationals care so much
about transfer pricing is that it determines how the profits of a
multinational are split between the jurisdictions in which it
operates. This in turn determines which country gets to tax those
profits, and this may affect the global tax burden of the
Source : Gareth Green
Page  6
Economic Double Taxation
 Article 9(2) “Where a Contracting State includes in the profits of
an enterprise of that State — and taxes accordingly — profits on
which an enterprise of the other Contracting State has been
charged to tax in that other State and the profits so included are
profits which would have accrued to the enterprise of the firstmentioned State if the conditions made between the two
enterprises had been those which would have been made
between independent enterprises, then that other State shall
make an appropriate adjustment to the amount of the tax
charged therein on those profits. In determining such adjustment,
due regard shall be had to the other provisions of this Convention
and the competent authorities of the Contracting States shall if
necessary consult each other.” – Corresponding adjustments
Page  7
Real Income Theory
 Global Profits
– Global Vantedge (P.) Ltd v. DCIT [2010] 37 SOT 1 (Delhi – Trib) –
“the total adjustment made in the hands of the appellant
together with the ALP already reported by it cannot exceed the
total revenue earned by the appellant and its associated
enterprise from third party independent clients”
– Apollo Health Street v. DCIT [2014] 45 507
(Hyderabad - Trib.) – “TP adjustments shall not exceed the global
profits earned by the assessee company”
Page  8
Key Concepts
 Associated Enterprise (AE)
 International Transaction (IT)
 FAR Analysis
 Comparability Analysis
 Adjustments
 Most Appropriate Method (MAM)
 Documentation
Page  9
International Transaction-S.92B
 S. 92B.(1) For the purposes of this section and sections 92, 92C, 92D and 92E,
“international transaction” means a transaction between two or more associated
enterprises, either or both of whom are non-residents, in the nature of purchase, sale
or lease of tangible or intangible property, or provision of services, or lending or
borrowing money, or any other transaction having a bearing on the profits, income,
losses or assets of such enterprises, and shall include a mutual agreement or
arrangement between two or more associated enterprises for the allocation or
apportionment of, or any contribution to, any cost or expense incurred or to be
incurred in connection with a benefit, service or facility provided or to be provided to
any one or more of such enterprises.
 S. 92B (2) A transaction entered into by an enterprise with a person other than an
associated enterprise shall, for the purposes of sub-section (1), be deemed to be a
transaction entered into between two associated enterprises, if there exists a prior
agreement in relation to the relevant transaction between such other person and the
associated enterprise, or the terms of the relevant transaction are determined in
substance between such other person and the associated enterprise. [where the
enterprise or the associated enterprise or both of them are non-residents irrespective
of whether such other person is a non-resident or not].
Page  10
Deemed International Transactions
 TPOs treating transactions between two residents as deemed international
– Circular No.14/2001 clearly explained that one of the parties must be a
non-resident in an International transaction.
– Transaction between two residents would not shift any profit outside
India – Morgan Stanley’s case.
 First ruling against the revenue:
– Genisys Integrating Systems [2012] 20 715 (Bang.)
– Kodak India Pvt Ltd vs. ACIT [2013] 37 233 (Mumbai - Trib.)
– Tellabs India Private Ltd. [2013] 35 341 (Bang-Trib) – not a
deemed international transaction, as conditions u/s 92B(2) not satisfied
 Now by an amendment through Finance Act 2014 even transaction
between two residents also may become international transaction.
Page  11
International Transaction-S.92B
Explanation inserted from 1st April, 2002 (retro)
the expression “International transaction” shall include :
 purchase, sale, transfer, lease or use – tangible property
 purchase, sale, transfer, lease or use – intangible property – transfer of
ownership or use of rights
 capital financing including borrowings, lending or
purchase/sale of marketable securities etc.
 provision of services – market research, scientific
administration, legal/accounting services etc
 business restructuring or re-organisation, entered into by an enterprise
with an associated enterprise,
Irrespective of the fact that it has bearing on the profit, income, losses, or
assets of such enterprises at the time of the transaction or at any future
 12
International Transaction-S.92B
 Case law neutralized on account of amendment:
 Guarantee not an International transaction :
– Four soft Ltd ITA No.1495/Hyd/2010
– Bharti Airtel Limited [2014] 43 150 (Delhi-Trib.)
(Post Amendment)
 Guarantee an International transaction -Four soft Ltd [2014] 44 479 (Hyderabad - Trib.) (Post Amendment)
 Overdue accounts receivable from AE not an Intl.Tran – Nimbus
Commns.Ltd(2011) 44 SOT 695(Mum), Patni Computer System ITA No.426
& 1131/PN/06
 Business reorganisation / restructuring not an Intl.Tran if there is no tax
trigger – Dana Corpn 321 ITR 178 (AAR) , Amiantit Intnl (2010) 322 ITR
678 , Goodyear Tyre & Rubber Co (2011) 334 ITR 69 (AAR) , Deere & Co
(2011) 337 ITR 277(AAR)
Page  13
International Transaction-S.92B
The expression “Intangible property” shall include :
 Marketing intangibles
 Technology intangibles – process, patents, know how
 Artistic intangibles – literary & musical copyrights etc.
 Data processing intangibles - software, data bases etc.
 Engineering intangibles - industrial design, trade secrets,
product patents, drawings and blueprints etc.
 Customer intangibles – lists, contracts, relationship, Pos
 Contract intangibles – favorable supplier, contracts, licenses,
franchises & non – compete agreements
Page  14
International Transaction-S.92B
The expression “Intangible property” shall include :
 Human capital intangibles – trained & organised work force,
employment agreements & union contracts
 Location intangibles – leasehold rights, mineral exploitation
rights, easements, air & water rights
 Goodwill intangibles – institutional, professional practice,
personal , celebrity – goodwill, going concern value
 Methods, programmes, systems, procedures, campaigns,
surveys, studies, forecasts, estimates etc.
 Any other similar item that derives value from intellectual
content rather than physical attributes
Page  15
International Transaction-S.92B
Wide gamut of transactions
PE of foreign Coy in India & its AE in India – will get covered
Transaction between two non-residents – giving rise to taxability
in India – gets covered
Indian Coy & its foreign branch - not covered
Deemed International transaction - S. 92B(2) now covers
transaction between two residents also
Wide enough to cover even non-routine transactions
Page  16
Comparability Analysis
 Comparability Factors
- OECD & UN TP Manual & Rule 10B(2)
 Characteristics of Property/Service
 FAR Analysis
 Contractual Terms
 Economic Circumstances
 Business Strategies
Page  17
Issues in comparability Analysis
Tested Party & Use of foreign comparables
Foreign Party may be selected as tested party
– General Motors India Pvt. Ltd. (TS-215-ITAT-2013(Ahd)-TP)
– Ranbaxy Laboratories Ltd. v. ACIT [2008] 114 TTJ 1 (Del. Trib)
Contrary decision by Mumbai ITAT
– Onward Technologies . v. DCIT [2014] 44 295 (Mum Trib.)
 Internal Comparables vs External Comparables
Internal Comparables preferable
– Technimount ICB (P.) Ltd v. ACIT [2011] 11 49.(Mum.)
 Internal TNMM whether to be audited?
Even unaudited can be considered
– 3i Infotech Ltd. vs. ITO [2013] 35 582 (Chennai - Trib.)
– Birla Soft (India) Ltd. Vs DCIT [2011] 44 SOT 664 (Delhi - Trib.)
– DHL Express (India) (P.) Ltd vs ACIT 46 SOT (Mum-Trib)
Page  18
Issues in Comparability Analysis
 Use of secret comparables & cherry picking
 Taxpayer has a right to examine & contest such data procured by TPO u/s
– Genisys Intergrating Systems (India) Pvt. Ltd. (2012) 20 715
 Cherry picking not acceptable
– Toshibha India Pvt. Ltd 2010-TII-14-ITAT-DEL-TP
 Number of uncontrolled transactions
 There is no hard & fast rule
– Willis Processing Services (I) (P.) Ltd. V. DCIT [2013] 30 350
(Mumbai - Trib.)
– Haworth (India) (P.) Ltd. V. DCIT [2011] 131 ITD 215 (Delhi)
– DCIT v. Petro Araldite (P.) Ltd [2012] 53 SOT 274 (Mum.) (URO)
Page  19
Issues in Comparability Analysis
 Turnover
 This is a key filter for which most decisions are in favour of assessee
except few contrary decisions
– Genisys Integrating Systems (India) P.Ltd. (2012) 20
– Quark Systems – 2010- TIOL- 31-CHD-SB
– Symantec Software Solutions (P) Ltd 46 SOT 48 (Mum)
 Contrary decisions
– Willis Processing Services (I) (P.) Ltd. V. DCIT [2013] 30
350 (Mumbai - Trib.)
– Capgemini India P Ltd vs. ACIT (2013) 33 5 (Mum Trib.)
Page  20
Issues in Comparability Analysis
 Contemporaneous Data
 Whether multiple year data allowed
 Budget 2014 Finance Minister stated that range concept & multiple
year data would be introduced. Likely to amend the rules.
 International transaction evaluation separately or on aggregate basis
 Rule 10A(d) closely linked transactions
– UCB India (P.) Ltd 30 SOT 95 (Mum.) - aggregation not allowed
– Development Consultant Pvt Ltd (2008) 23 SOT 455- Same view as
 OECD TPG P.3.9 & UN TP P. supports aggregation in deserving
– This approach endorsed by Pune ITAT in Demag Cranes &
Components 56 SOT 187 (Pune)
Page  21
Issues in Comparability Analysis
Functional Comparability
 FAR analysis very critical
 Contract Manufacturer cannot be compared with regular manufacturer
High profit/ loss making companies
 These companies should be avoided while selection para 3.59 & 3.65
OECD TPG – Noteworthy
 UN TP manual para
– Exxon Mobil Co. India (P.) Ltd. v. CIT [2011] 46 SOT 294 (Mum.)
– Maersk Global centers India P.Ltd [2014] 43 100 (MumTrib) (SB)
– Saven Technologies TS-44-ITAT-2014(HYD)-TP - Startup companies
subsequent years operations to be analysed.
Page  22
Issues in Comparability Analysis
 Related party transactions
– Generally 25% is taken as yardstick in TP assessments
Name of the Case
RPT Filter Upheld
24/7 p Ltd vs. DCIT [21 ITR 514
Actis Advisers Pvt. Ltd. vs. DCIT [20 ITR138 (Del.)(Trib.)]
Avaya India Pvt. Ltd. vs. ACIT [15 ITR 237(Del.)(Trib.)]
Benetton India Pvt. Ltd. vs. ITO [7 5 / 134 ITD
229 (Del.)(Trib.)]
Bindview India Pvt. Ltd. vs. DCIT [34 164
HCL EAI Services Ltd. vs. DCIT [ IT(TP) A
Page  23
Issues in Comparability Analysis
Name of the Case
RPT Filter Upheld
ITO vs. CRM Services India (P) Ltd. [48 SOT 41 (Del.)(Trib.)]
LG Soft India P. Ltd. vs. DCIT [ITA no. 1121/(B’lore)(Trib.)
M/s. ADP P Ltd. vs. ACIT [15 ITR 203 (Hyd.)(Trib.)]
PTC Software (India) Pvt. Ltd. vs. ACIT [ITA No.
Philips Software Center Pvt. Ltd. vs. ACIT [26 SOT 226
(B’lore) (Trib.)]
Even a single
Sony India (P) Ltd. vs. DCIT [ 114 ITD 448 (Delhi.)(Trib.)]
Thyssenkrupp Industries India Pvt. Ltd. vs. ACIT 33 107 (Mum.)(Trib.)
Page  24
Issues in Comparability Analysis
Inadequate / Nil Comparable - OECD TPG P.3.41 to 3.46
 Additive approach
• Third parties engaged in comparable transactions
• Similar to identifying internal comparables
• May encompass both internal and external comparables
• May come from other industries with similar functions
 Deductive approach
• Search on Databases with search filters
• In case of scarcity of comparables deductive approach would
be supplemented by additive approach
Page  25
Safe Harbour Rules
 The assessee is required to apply for opting safe harbour rules in Form
3CEG to AO
 The proposed safe harbour rules would apply to AY 2013-14 & 2014 -15.
 Assessee would not be entitled to margin variation benefit U/s 92C or any
other comparability adjustment such as, capacity, risk, working capital,
 Assessee opting for safe harbour rules shall not be allowed to invoke
Mutual Agreement Procedure (MAP).
 Definition –
– Eligible assessee
– Insignificant risk
– Eligible International transaction
Page  26
Safe Harbour Rules
 Contract research and development services- where the safe
harbour rules are not applicable TNMM shall be considered as
the MAM unless shown by the assessee that it is not feasible
to apply this method.
 Safe harbour rules are not applicable if the associated entities
are located in any country or territory notified under section
94A or in a no tax or low tax jurisdiction.
Low tax jurisdiction is defined as the one where maximum
marginal rate of tax is less than 15%.
Page  27
 Traditional Transaction Methods
• Comparable Uncontrolled Price Method (CUP)
• Resale price method (RPM)
• Cost plus method (CPM)
 Transactional Profit Methods
• Profits split method (PSM)
• Transactional net margin method (TNMM)
 Other method
Page  28
Comparable Uncontrolled Price Method (CUP)
 Most ideal – meticulous similarity –
adjustments – Rule 10B (1) (a)
identify differences –
• Internal comparables
• External CUPs
• Differences in business functions – adjustments?
• Characteristics of the property
• Contractual terms
 CUP is the most direct & reliable method
 Economic circumstances & characteristics must be comparable
 Strictest parameters for application
Page  29
Comparable Uncontrolled Price Method (CUP)
 CUP method is ideal for :
Transfer of homogeneous items – trading
Interest rates – on loans
Transactions that are dependent on publicly available market
– Adani Wilmar Ltd [2014] 45 365 (Guj) – Price
publications by independent agency – CUP
– KTC Ferro Alloys Pvt Ltd [2014] 161 TTJ 228 (Visakha.Trib) Quotations and estimations – External CUPs
Page  30
Resale Price Method (RPM)
 RPM meant for trading of goods / services without any value
 Resale of products in short time
 Packaging, repacking, labeling / minor assembly allowed
 Ideally suited for distributors
 Assessee purchasing goods / services from AE and reselling to
unrelated parties
 Gross margin comparison – functional comparability
 Possible only with internal comparables
 Detailed FAR analysis critical
Page  31
Resale Price Method (RPM)
 Comparability possible with reasonable adjustments for
 contractual terms
 Inventory turnover
 transport cost
 other measurable differences
 Quality of data / assumptions / consistent accounting practices –
critical for success of RPM
 RPM may not be reliable if differences exist in:
 Level of market ; or
 Functions performed; or
 Products sold
 RPM is the MAP for pure trading transactions having no value
addition – Nokia India (P) Ltd (TS-349-ITAT-2014(Del)-TP)
Page  32
Cost Plus Method (CPM)
 CPM used for
semi finished goods sold to AEs
contract / toll manufacturing
 long term buy / supply arrangements
Page  33
services provided
Functional comparability – gross margins
Direct and indirect cost - cost base – Critical
Indirect cost allocation – area of dispute
FAR analysis critical for comparability
Cost Plus Method (CPM)
 Efficiency / inefficiency – no adjustment
 Industry practice to be followed – direct & indirect costs
 CPM practical only with internal comparables
 Consistent accounting practices – critical
– Alumeco India Extrusion Ltd [2013] 38 371 (HydTrib)- CPM to be preferred over TNMM
– GE BE Pvt Ltd [2014] 42 554 (Bang) – CPM is the
MAM for contract manufacturers
– L’oreal India Pvt Ltd [2012] 24 192 (Mum)– ALP
based on gross margins are preferred over other methods
Page  34
Cost Plus Method (CPM)
 Adjustments required for
Page  35
complexity of manufacturing / assembling
manufacturing, production & process engineering
procurement, purchasing & inventory control
Testing functions
Selling, general & administrative expenses
accounting treatment of costs
foreign currency risks
contractual terms
Cost Plus Method (CPM)
 CPM may not be reliable if material differences exist on
account of :
Page  36
cost structure
business experience
management efficiency
functions performed
Profit Split Method (PSM)
 Applicable mainly in International Transactions involving transfer
of unique intangibles or in multiple International Transactions
which are so interrelated which can not be evaluated separately
for determining Arm’s Length Price (ALP)
 The combined profit to be allocated to Associated enterprises
on the basis of market returns of similar transactions by
Independent Enterprises (TNMM)
 Residual combined net profits of Associated Enterprises
 Relative contribution of each Associated Enterprises on the
basis of FAR analysis .
 Such residual Net profit is split among the Associated
Enterprises in proportion to their contributions.
Page  37
Profit Split Method (PSM)
 Residuary Profits is to be done on the basis of contribution of each
– Global One India (P.) Ltd. [2014] 44 100 (Delhi Trib.)
 Profit split Method is most appropriate for bench marking of cost
collection received/paid to AEs for providing Freight services .
– Net Freight (India) (P.) Ltd. [2014] 42 504 (Del Trib.)
Page  38
Transactional Net Margin Method (TNMM)
 Net margin comparison – broad functional comparability
 Tested party – least complex entity without any intangibles
 Profit level indicator (PLI)
• Operating margin
• Cost cover ratio
• Return on the assets ratio
• Berry ratio
 Aggregation of transactions – interlinked – Rule 10A(d)
 Search process – documenting critical
 Last resort method – but widely used
Page  39
Transactional Net Margin Method (TNMM)
 Irons out many functional differences – adjustments to be made if
required – Comparability
 Revenue prefers TNMM in spite of assessee relying on other
methods with suitable data
 Contemporaneous data – multiple year data
 Whether internal TNMM allowed when international transactions
are limited ?
 Business strategies & unique situations
 FAR analysis – very critical
Page  40
“Other Method” for determination of ALP
 New Rule 10AB inserted vide Notification No.18/2012
dated 23-05-2012
 Refers to “price which has been charged or paid, or would have
been charged or paid, for the same or similar uncontrolled
transaction, with or between non-associated enterprises, under
similar circumstances, considering all the relevant facts”
Page  41
Important Judicial Perspective
 Whether PBDIT is allowed?
– BA Continuum India Pvt Ltd – TS 295 ITAT 2013 (Hyd)-TP
– Pentair Water India Pvt Ltd – TS 153 ITAT 2014 (PAN) -TP
– Schefenacker Motherson Ltd – 2009-TII-05-ITAT-(Del)-TP
– Qualcore Logic Ltd Vs DCIT [2012] 22 4 (Hyd)
 Idle Capacity - adjustment to be made for underutilisation of
– Google India Pvt Ltd -TS- 161 ITAT 2014 (Bang)-TP
– Mando India Steering Systems Pvt Ltd – TS 110 ITAT 2014 (CHNY) -TP
– El Dupont India Pvt Ltd. [2012] 49 SOT 123 (Delhi)
– CRM Services India Pvt Ltd (2011) 48 SOT 41 (URO) (Del.Trib)
Page  42
Important Judicial Perspective
 Commercial expediency of expenditure cannot be questioned by TPO
– Social Media [2013] 40 37 (Hyderabad - Trib.)
– Airliquide Engineering India P Ltd [2014] 43 299 (Hyd Trib.) - relying on EKL Appliances
 R & D Expenses – Cost Contribution Agreement
– Indigene Pharmaceuticals [2014] 43 270 (Hyd)
– Dresser Rand India P Ltd (2011) 47 SOT 423 - R & D activity & accrual
of benefit
– Dufon Laboratories (2010) 39 SOT 59 (Mum.Trib) – Legitimacy of
expenditure cannot be questioned
– British Gas India Pvt Ltd 45SOT 172 (URO)(Del.Trib) – Cost sharing
agreement different from rendering of services
Page  43
Important Judicial Perspective
 Rejection of functionally different comparables allowed though included
in TP Study
– Parexel International ITA No.144 & 607/Hyd/2014
– Ivy Comptech Pvt ltd [2013] 40 227 (Hyderabad - Trib.)
– Deloitte Consulting [2013] 36 68 (Hyderabad - Trib.)
– Quark Systems [2010] 38 SOT 307 (CHD.) (SB)
 Companies with extraordinary events to be excluded
– Conexant Systems Pvt.Ltd ITA No. 1160/Hyd/2011
– Intoto Software [2013] 35 421 (Hyderabad - Trib.)
– Ness Innovative Business Services P Ltd TS-177-ITAT-2014(HYD)-TP
Page  44
Important Judicial Perspective
 Only persistent loss making companies to be excluded :
– John Deere India P Ltd TS-351-ITAT-2014(PUN)-TP
– Cummins Turbo Technologies Ltd [2013] 35 350 (Pune - Trib.)
– Qualcom India [2013] 37 306 (Delhi - Trib.)
– Saven Technologies (TS-44-ITAT-2014(HYD)-TP)
 Royalty Payment :
 RBI approval itself establishes arm’s length standard
– Airliquide Engineering India P Ltd [2014] 43 299 (Hyd - Trib.)
– Owens Corning India P Ltd – TS 328 ITAT 2014 (Del) -TP
 Royalty to be benchmarked under TNMM
– Airliquide Engineering India P Ltd [2014] 43 299 (Hyd - Trib.)
– Cadbury India Ltd – TS 314 ITAT 2013 (Mum) – TP
Page  45
Important Judicial Perspective
 TP adjustments to be only on Intl.Trans.
– Alumeco India Extrusions Ltd [2013] 38 382 (Hyd)
– Genisys Integrating Systems [2012] 53 SOT 159 (Bang)
– Global Vantedge 37 SOT 1 (Del)
 Interest on Loans to AEs - comparing interest rate on rupee loans with
foreign currency loans an economic mismatch
 LIBOR + Percentage rate as correct:
– Aurobindo Pharma Ltd [2014] 43 418 (Hyd)
– Foursoft Ltd 46 SOT 141 (Mum)
– Siva Industries & Holdings Ltd 46 SOT 112 (Chennai)
 Tainted Comparables to be excluded
– Market Tools Research P Ltd (2013) 32 358 (Hyd Trib)46
Page  46
Important Judicial Perspective
 Traditional Transaction Methods Vs Profit Methods :
• OECD guidelines originally held Transaction methods preferable to
profit methods.
• OECD TP guidelines 2010 now suggest MAM ITAT ruled in favour of transaction methods
– Alumeco India Extrusion Ltd. [2013] 38 382 (Hyd)
– MSS India - 2009-TII-07-ITAT-PUNE
– Serdia Pharmaceuticals 44 SOT 391 (Mum)
– Clear Plus India (P.) Ltd. vs DCIT, Circle-3(1), Delhi [2011] 10 249
– Delphi TVS Diesel Systems Ltd. [2012] 24 179 (Chennai)
Page  47
Important Judicial Perspective
AMP Expenses - Advertisement, marketing and sales promotion expenses
BMW India (P.) Ltd. V. ACIT [2013] 37 319 (Delhi - Trib.)
 As per importation agreement between assessee and its foreign AE, assessee
had performed greater intensity of service than a normal distributor, by also
performing functions of advertisement, it contributed to brand building for its
AE, and constituted an international transaction. Bright line is an accepted
method for calculating non routine AMP expenditure following LG Electronics
SB ruling..
 Compensation for such higher service was embedded in pricing arrangement
of contract goods itself and price charged was adequate to ensure recovery of
total costs as well as earning of representative profits, no transfer pricing
adjustment was required.
Page  48
Latest Case Law
Maersk Global Centres (India) (P.) Ltd. V. ACIT [2014] 43 100
(Mumbai - Trib.) (SB)
Large number of services falling under ITES and where there difficulty in classifying
these services either as low end BPO services or high end KPO services, it is not
always possible to bifurcate ITES services as BPO and KPO services for purpose of
comparability analysis
In transfer pricing proceedings, potential comparables cannot be excluded merely
on ground that their profit is abnormally high rather such a case would require
further investigation to ascertain reasons for unusual high profit in order to
establish whether entities with such high profit can be taken as comparables or
In course of transfer pricing proceedings, TPO made adjustment to assessee's ALP
engaged in rendering IT enabled services, in view of fact that assessee was
basically a BPO, providing low-end services like process support, voice calling etc.,
whereas comparables selected by TPO were maintaining KPOs providing high-end
technical services, impugned adjustment was to be set aside and, matter was to
be remanded back for disposal afresh.
Page  49
Latest Case Law
Tata Communications Transformation Services Limited vs. DCIT [TS-377-ITAT2014(Mum.)
 Upholds assessee’s "transaction based benchmarking" against TPO’s entity
level TNMM
 Assessee's international transactions of ‘communication network
operation/engineering services’ and ‘administrative support services’ are
different activities, to be evaluated separately for ALP determination;
 TPO/ DRP not justified in rejecting segmental results merely because
segments were unaudited or prepared later only for purpose of TP study
 Unless any defect is pointed out in segmental results shown by assessee,
TPO/DRP cannot reject the same;
 Restores matter to AO / TPO with directions to consider and verify audited
segmental accounts of assessee.
Page  50
Latest Case Law
Vodafone India Services (P.) Ltd. V. Union of India [2014] 50 300
(Bombay) (HC)
Issue under consideration : Issuance of Equity Shares by Indian company to
its foreign parent
– Share premium has been made taxable by a legal fiction under Section 56(2)(viib) and
the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is
brought into the ambit of income is the premium received from a resident in excess
of the fair market value of the shares.
– In the case of Vodafone what is being sought to be taxed is premium allegedly not
received on application of ALP
– The capital receipts received by the Petitioner on issue of equity shares to its holding
company or the alleged short-fall between the so called FMV of its equity shares and
the issue price of the equity shares cannot be considered as income.
– Therefore, absent express legislation, no amount received, accrued or arising on
capital account transaction can be subjected to tax as Income.
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Latest Case Law
 In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing
(a)subject of tax;
(b)person liable to pay the tax;
(c)rate at which tax is to be paid, and
(d)measure or value on which the rate is to be applied.
 There is difference between a charge to tax and the measure of tax (a) & (d) above. This distinction is
brought out by the Supreme Court in Bombay Tyres India Ltd. v. Union of India reported in 1984 (1)
SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of
the tax is the selling price of the manufactured goods.
 In this case also the charge is on income as understood in the Act, and where income arises from an
International Transaction, than the measure is to be found on application of ALP so far Chapter X of
the Act is concerned.
 The arriving at the transactional value/ consideration on the basis of ALP does not convert nonincome into income. The tax can be charged only on income and in the absence of any income
arising, the issue of applying the measure of ALP to transactional value/consideration itself does not
 The ingredient (a) above is not satisfied i.e. subject of tax is income which is chargeable to tax. The
issue of shares at a premium is a capital account transaction and not income.
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Latest Case Law
Wider meaning of “Income” is not permissible in absence of specific provision in
the statute.
Chapter X does not include a charging provision:
 It is well settled position in law that a charge to tax must be found specifically
mentioned in the Act. In the absence of there being a charging Section in
Chapter X of the Act, it is not possible to read a charging provision into Chapter
X of the Act.
 There is no charge express or implied, in letter or in spirit to tax issue of shares
at a premium as income.
 Chapter X of the Act is a machinery provision to arrive at the ALP of a
transaction between AEs. The substantive charging provisions are found in
Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and
gains of business), 45 (Capital gain) and 56 (Income from other Sources).
Issue of shares does not give rise to any income from an admitted International
Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a
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Latest Case Law
Shell India
The Bombay High Court’s decision on 18th November, 2014 favoured Shell on
the grounds that issuance of shares by an Indian company to its foreign parent
was not exigible to the Transfer pricing provisions,
The High Court held that the legal principle laid down by it in the Vodafone case
in October 2014 also applies in the Shell case too and rejected the I-T
department’s argument that the facts of the Shell case were different from the
Vodafone case.
The ruling in the Shell case follows the Bombay High Court’s decision in the
Vodafone case, which had held that the transfer-pricing regulations would not
be applicable if there is no income component involved in the transaction.
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Form 3 CEB
Part – A
Nature of business or activities of the assessee
Aggregate value of international transactions as per books of accounts
Aggregate value of specified domestic transactions as per books of accounts
Part – B
Tangible Property
Intangible property:
International transactions in respect of transfer and lease
Provision of Services
Lending or borrowing of money
Issue and buyback of equity shares
Mutual Agreement / Arrangement (Apportionment of Contribution / Cost / Expense incurred)
International transaction arising out / being part of any business restructuring or reorganization
Transactions having bearing on the profits, income, losses or assets
Page  55Deemed international transaction
Page  56

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